Pet lovers open wallets for PetSmart

AndriaCheng

NEW YORK (MarketWatch) — While the broader markets are in a jittery mood about the eurozone economic crisis, PetSmart Inc. shares saw their biggest gain in almost 10 years on Wednesday as Americans continued to show their love for their pets through their wallets.

PetSmart
PETM
shares rose 13% to $62.99, the biggest daily percentage gain since July 2002, after it reported a better-than-expected first-quarter profit and raised its outlook for the year. The S&P 500 Index and the Dow both closed little changed after declining earlier in the day.

Its stock has jumped 23% this year, outpacing the 16% rate of the S&P Retail Index and the 4.9% increase of the S&P 500 Index during the same period.

Easing investor concerns about online competition led by Amazon.com Inc.’s
AMZN, +0.50%
introduction of Wag.com last year and competition from discounters such as Wal-Mart Stores Inc.
WMT, +0.50%
PetSmart posted a 7.4% increase in same-store sales in the first quarter as comparable transactions were positive for the eighth straight quarter.

“The sector has remained impressively (Wal-Mart) and (Amazon) proof,” said Stifel, Nicolaus & Co. analyst David Schick, adding PetSmart’s comparable sales gain was the highest since that in the first quarter of 2004 and at least its 53rd straight quarterly increase.

While the pet ownership in the U.S. has stayed steady in recent years, spending has climbed in at least each of the past 10 years, according to the American Pet Products Association.

About 73 million homes, or 62 % of American households, own a pet, according to a 2011-2012 survey by the trade group. That was up from 56% of U.S. households in 1988 when the survey was first conducted and unchanged from 62% in 2008.

However, spending is expected to rise to $52.9 billion this year from $51 billion last year and from $43.2 billion in 2008.

Other retailers also are capitalizing on the trend. Sears Holdings Corp.’s
SHLD, +0.98%
Kmart chain, for instance, has expanded its pet-gear section and this month began to sell pet prescription drugs.

“We favor the pet retail industry for its growth characteristics and our belief that it is also recession-resistant,” said Standard & Poor’s analyst Michael Souers.

Analysts said PetSmart also deserves credit beyond benefiting from the industry trend. It’s also more insulated from increased competition from its online and discount rivals because shoppers buying at specialty retailers tend to have a higher-than-average income.

The company, for instance, has boosted demand through charity efforts that help 1,100 pets to be adopted each day in its stores and through its offers of new adoption and puppy starter kits that come with coupons for its products and services. (Executives said the rate of adoption, which increased in the fourth quarter, continued in the first quarter.)

PetSmart also has expanded its space for its priciest products and items exclusive to its stores and other fastest growing categories. To lift demand, it’s unveiled an exclusive line of toys under Toys “R” Us Pets label and is launching a pet gear line designed by musician and pet owner Bret Michaels.

Those launches followed the 2010 introductions of Martha Stewart Pets and GNC Pets supplements lines that are exclusive to PetSmart stores. Those are among its more expensive lines that the company has credited with generating sales.

The retailer also has opened more stores including its PetsHotel concept to bring its total to 1,241 stores and 194 hotels.It also has set up Banfield pet hospitals inside almost 800 of its stores. Grooming, training and other pet services business also continued to lift demand and traffic.

PetSmart profit rose to $94.7 million, or 85 cents a share, from $70.9 million, or 61 cents, a year earlier. Total sales rose 9.4% to $1.6 billion.

That topped the 73-cent average estimate of analysts surveyed by FactSet. Sales also exceeded expectations.

Grooming and other service sales, about 11% of total, rose 8.3% to $181 million.

Gross margin widened 0.9 percentage point to 30.5%.

The company raised its full-year profit forecast to $3.19 to $3.31 a share from its prior projection of as much as $3.16 a share. It sees same-store sales to rise in the mid-single-digit rate.

“Although the macroeconomic environment still holds some uncertainty, we remain cautiously optimistic about the outlook for 2012,” said Chief Financial Officer Lawrence Molloy on a conference call. “We feel pretty good about the business right now going into the quarter.”

The company also said it continues to see no impact from any online competition.

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